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Last month, LBRY, a cryptocurrency start-up, lost its lawsuit with the SEC as the court ruled that the company offered unregistered securities in the form of LBRY tokens.
The LBRY case has been closely watched, as many believed it might set a legal precedent in the nascent crypto space. In the wake of LBRY's loss, a few individuals have voiced their skepticism about Ripple winning its lawsuit with the SEC.
CryptoLaw founder John Deaton shares his take on this. Ahead of the LBRY loss, Deaton had predicted that some might claim that Ripple would suffer the same fate.
IS RIPPLE GOING TO LOSE BECAUSE @LBRYcom LOST?
— John E Deaton (@JohnEDeaton1) December 11, 2022
I predicted if LBRY lost 2 things would happen: 1) the SEC would rush the decision to Judge Torres acting as if the Supreme Court ruled; and 2) people would come out of the shadows and claim Ripple & XRP will share the same fate.
Deaton points out that the SEC did a decent job in its last brief, which is the reply brief to summary judgment motions, and also in its response to Ripple's pre-1934 Blue Sky Laws argument. The truth, according to Deaton, is that Ripple does not bear the "burden of proof" but rather the SEC does.
He believes that Ripple has put forward a superior argument, stating that Ripple's summary judgment motions were "appellate ready briefs," written for the 2nd Circuit and above.
In his words, "Ripple is hoping to win at the District Court but is playing the long game," meaning that, possibly, the arguments were far too strong at the district court level.
Regarding this, Deaton offers the instance of the Ripple defense against the word "scheme" used by the Supreme Court in Howey, saying it only applies after the court first finds that an underlying contract exists.
"I don't believe Judge Torres is going to agree with that argument. It would require her to believe Judge Castel was wrong in Telegram as well as several appellate courts," Deaton stated.
The CryptoLaw founder explains that Ripple's best chances at winning at the district court level are with "a strict Howey analysis."
The Ripple case being filed in the second circuit adds to its advantages compared to LBRY. Also, LBRY did not contest the common enterprise factor. On the other hand, in the Ripple case, the defendants' amicus briefs and XRP holders vigorously contested this factor.
On the other hand, Deaton says the SEC needs to establish horizontal commonality to guarantee its win in the lawsuit.
According to him, "Horizontal commonality is established when investors' assets are pooled and the fortunes of each investor is tied to the fortunes of other investors as well as to the success of the overall enterprise."
Alex Dovbnya
Yuri Molchan
